NZ Morning Focus

- The Brexit referendum result sparked severe market reactions, although some sharp moves moderated to a degree on Friday night.

- Central banks have said they will provide liquidity. But uncertainty reins, and all eyes are now on the UK and European political responses.

OUTLOOK

UPCOMING TODAY: Local overseas trade data for May is due at 10:45am.

CURRENCY: After a sharp drop, kiwi has bounced and is again showing resilience. But further near-term upside may be a challenge from here.

RATES: The retracement in global yields from their lows may see the local curve open higher. But risk aversion should cap the upside.

REVIEW

GLOBAL MARKETS OVERVIEW: Flight to safety reined, although initial extreme moves were pared as a chorus of central bankers offered up liquidity to the market. The GBP plunged, but then bounced modestly. It was a similar story for other currencies, although moves were far more modest. European equities were sharply lower (Euro Stoxx: -8.6%), although the FTSE 100 ironically outperformed (-3.1%). German and US 10-year bond yields finished down 14 and 19bps respectively, although peripheral European yields rose. Credit markets deteriorated, with US IG widening 10bps, and high yield lifting 38bps. Commodities were mixed: gold +4.7%; oil -5%.

DATA PULSE

TAKING A BACK SEAT. It clearly wasn’t the focus, but US data came in on the weaker side of expectations. Both durable goods and consumer confidence fell, and the details of the former were also a little softer.

COMMENTARY - KEY THEMES AND VIEWS

NOW WHAT? It is impossible to do justice to what has occurred over the past few days in the small space available here. For many market participants it will be one of those "always remember where you were and what you were doing" kind of moments. Price action has been phenomenal and volatility will surely continue for some time yet. We’re now seeing various views expressed on what the result could mean for the UK and Europe, and the global economy for that matter. Some believe it is calamitous, others not so much. But the bottom line is that no one can confidently say how events will play out from here as it depends on a number of highly uncertain elements. What is clear though is that the uncertainty alone is not positive for the near-term global growth outlook. But whether it turns into a more dramatic negative shock will depend on how well markets respond to central banks’ reassuring words and actions; whether it emboldens other European leaders to fix EU problems or does the opposite and sees a snowball effect as other countries reassess their European positions; or whether the tightening in financial conditions proves temporary or more persistent; the list goes on. Clearly, politics has rocketed up the list of things markets should be focused on.

KEEPING WATCH FROM AFAR. So how does this all affect little old New Zealand? At first blush, the direct implications appear manageable. The UK is not as large a trading partner as it once was (although it is still an important market for some exports). It is the indirect implications that we will be watching closely, particularly commodity and credit markets and how the NZD behaves. There would obviously be growth implications from weaker commodity prices, tighter credit markets and a strong NZD. Whatever the case, the odds of an August OCR cut have increased.